Note #5: A White Paper – New Tax Incentives to Encourage Private Donations of  Parkland and Recreation Land

More than a decade ago, Charles Fraser contacted me to help him in his effort to expand tax code incentives (and reduce or eliminate tax code disincentives) so more real estate developers would donate more land for public recreational uses. His plan involved a number of steps. First, do a “White Paper” that discussed the tax issues and made recommendations for changes. Second, enlist support for the White Paper and the changes among both developers and environmental groups. Then, raise money to do the lobbying in Washington, DC, to make the changes in the tax code that would encourage more such donations.

What follows in this Note #5 is the White Paper I wrote as the first step in Charles’ plan. Unfortunately, he was the principal backer of this concept, and after his untimely death in 2002 the project itself died a quiet death for lack of financial support to continue the effort. The points raised in the White Paper are as valid today as they were a decade ago.

One other observation before we proceed to the White Paper. One of the incentives we advocated in the White Paper was more generous tax incentives for certain conservation donations. As many readers of Notes know, increased incentives for conservation easement donations were in the tax code from 2006 through the end of 2013, and these incentives resulted in the protection of hundreds of thousands of acres of land. The incentives expired at the end of 2013. The Land Trust Alliance and other groups have been working hard to reinstate the enhanced incentives, but at this date that has not happened yet.



Stephen J. Small
Law Office of Stephen J. Small, Esq., P.C.
Newton, Massachusetts
tel:  617-357-4012
fax:  617-357-1857


Copyright 2002 by Stephen J. Small, Esq. All rights reserved.



The purpose of this White Paper is to lay the foundation for a “Tax Incentives for Parklands” project. This project will involve a coordinated effort to change our federal tax rules to provide greater encouragement and incentives for charitable gifts of parkland and recreational land to government agencies and charitable organizations. These incentives should be targeted to encourage such gifts within and surrounding metropolitan areas around this country that are likely to be urbanized within the next twenty to forty years.

This White Paper will identify current federal tax code barriers to such gifts, propose new federal tax incentives, propose changes to certain appraisal and valuation rules, and encourage broad cooperation and further funding for this important effort.

Under limited circumstances, Section 170(h) of the federal tax code now allows an income tax deduction for the gift of a conservation easement that serves to protect some significant conservation values. To qualify under Section 170(h), the gift must meet one of the four “conservation purposes” tests under Section 170(h)(4). One of those tests is that the gift must further “public outdoor recreation and education.” Another test encourages gifts that protect open space and further “clearly delineated Federal, state, or local governmental policy.” This public tax code policy has been in effect for more than twenty years.

Because of the growing use of conservation easements, there is now a widespread misperception that the tax code provides incentives to all types of taxpayers for all types of gifts of land for parks, recreation areas, and open space. In fact, for many taxpayers, tax incentives for gifts of parkland, bike trails, habitat conservation areas, community sports fields, and other active public recreation areas are blocked by the tax code in a manner that is harmful to sound public policy. This White Paper addresses these barriers to needed public parks.


EXAMPLE 1.  In 1990, Mr. and Mrs. Brown, owners of a very successful family business, set up Brown Family Holdings Corp. (“Family Holdings”). They contributed $300,000 in cash to Family Holdings, and filed the election to have Family Holdings treated as an S corporation for federal income tax purposes. The following year, they gifted a total of 30% of the stock to their three children.

Family Holdings subsequently purchased Riverview, 300 acres of forestland, for $300,000. At that time, Riverview was about 30 minutes away from the expanding metropolitan area where Mr. and Mrs. Brown had grown up.

Over the past decade, the family business has continued to grow and prosper, the metropolitan area has continued to grow and prosper, and Riverview is now worth many times what Family Holdings paid for it.

Mr. and Mrs. Brown have recently said they “want to give something back,” and have agreed that they plan to have Family Holdings donate Riverview to the city for use as a public park and nature preserve.

Mr. and Mrs. Brown have been advised that:

  1. Riverview has a fair market value of about $3 million;
  2. if Family Holdings donates Riverview to the city, the deduction by the S corporation will flow through the corporation pro rata to its shareholders;
  3. under the federal income tax rules that apply to S corporations, the $3,000,000 deduction will only flow through to the shareholders to the extent they have basis in their S corporation stock,   or $300,000; and
  4. as a result, $2,700,000 of the charitable contribution deduction will effectively be lost.

Based on this advice, Mr. and Mrs. Brown are being advised to forget a charitable donation, and to sell the land for $3,000.000.

EXAMPLE 2.  Assume the same facts as in EXAMPLE 1, except that shortly after the acquisition Family Holdings began to plan for the development of Riverview. After the appropriate engineering, market, and other studies, Family Holdings filed plans with the County to develop Riverview into five separate “neighborhoods,” with between 10 and 20 homes in each neighborhood. The plans included significant open space and woodland, with wooded buffers along the river and the highway.

County regulators approved the plans, with minor modifications, and all necessary permits were issued.

Over the past decade business has been very good. The first four planned neighborhoods have sold out. The 15 approved lots in the remaining neighborhood, with ready access from the county highway and close to the river, are about to go on the market.

However, after extensive meetings and conversations with municipal and county officials and the local land trust, Mr. and Mrs. Brown have decided that Family Holdings should donate to the county, for use as a park and nature preserve, the remaining 50 acres more or less (including the 15 approved lots).

Mr. and Mrs. Brown have been advised that:

  1. The fair market value of the gift, using a cost-of-development or discounted cash flow analysis, is $2.5 million;
  2. because they have left earnings in the S corporation over the years, the stock basis of all the Family Holdings stock is in excess of $3 million; and
  3. because Family Holdings is a “dealer” in real estate and has been holding the remaining lots in inventory for sale to customers, the deduction for the gift of the 50 acres, including the 15 approved lots, will be limited to its cost or basis, which Family Holdings’ accountant estimates to be $250,000.

Based on this advice, Mr. and Mrs. Brown are being advised to forget a donation to a park agency, and to sell the property.

EXAMPLE 3.  Assume generally the same facts, except that Family Holdings did not elect to be treated as an S corporation. However, also assume that Family Holdings never filed any subdivision plans, or did any engineering or market studies, with respect to the last 50 acres (which are separated from the balance of Riverview by a small hill), and the 50 acres was never carried on the books as inventory.

Over the years, business for Family Holdings has been good, and the company acquired and developed other real estate. This year, the accountant for Family Holdings estimates that the corporation’s taxable income will be roughly $2,000,000. However, Mr. and Mrs. Brown anticipate that business will be winding down, and income will be winding down sharply, over the next few years.

After extensive discussions with city and county officials and the local land trust, Mr. and Mrs. Brown have decided to donate the 50 acres to the city, for use as a park and nature preserve.

Mr. and Mrs. Brown have been advised that:

  1. although Family Holdings is in the real estate development business, the 50 acres has never been carried as inventory and if Family Holdings makes a charitable contribution of that property the company can deduct its full fair market value (rather than having the deduction limited to cost or basis);
  2. the fair market value of the gift, using a cost-of-development or discounted cash flow analysis, is $2 million;
  3. because Family Holdings is a regular corporation (as opposed to an S corporation), it can deduct a charitable contribution up to 10% of its taxable income for the year of the gift, with a 5-year carryforward of any unused amount; and
  4. therefore, on these facts, roughly $200,000 of the charitable gift will in fact be deducted and most of the $1,800,000 balance of the gift will be lost.

Based on this advice, Mr. and Mrs. Brown are being advised to forget a donation and to sell the property.

EXAMPLE 4.  Assume generally the same facts, except that shortly after Mr. and Mrs. Brown acquired Riverview they set up the Brown Family Limited Partnership (the “Partnership”). After its formation, Mr. and Mrs. Brown were the original general and limited partners and they conveyed Riverview to the Partnership. Over the following years, Mr. and Mrs. Brown gave limited partnership interests to their three children every year.

Mr. and Mrs. Brown and the children have agreed they “want to give something back,” and they have agreed on a plan to have the Partnership donate Riverview to the city for use as a public park and nature preserve.

Mr. and Mrs. Brown and the children have been advised that:

  1. Riverview has a fair market value of about $3 million;
  2. if the Partnership donates Riverview to the city, the deduction at the partnership level will flow through the Partnership pro rata, and may be used by the partners on their individual federal income tax returns; and
  3. the donation available to each partner may be deducted generally up to 30% of that partner’s adjusted gross income for the year of the gift, with a five-year carryforward of any unused amount.

Based on this advice, Mr. and Mrs. Brown and their children are planning to complete the gift by the end of this calendar year.


As should be clear, the first three examples above illustrate a clear desire to dedicate land to a use with unequivocal public benefits, are clear examples of generosity, and propose the charitable contribution of high-value highly developable real estate. The examples also illustrate three different situations where potentially significant philanthropy and public benefit may be thwarted, not encouraged, by the tax code, which for no discernible policy reasons grants or withholds deductions for donations based solely on the particular form of ownership.

The purpose of this WHITE PAPER is threefold:

  1. to identify new tax code incentives, or propose the elimination of current tax law disincentives, to encourage more donations of land for public park and recreation purposes;
  2. to propose changes in certain appraisal and valuation rules that currently inhibit many gifts of land for public purposes; and
  3. to serve as a first step in gaining wider support and further funding to pursue these publicly beneficial goals in Congress and if necessary in the executive branch.


Here is an initial list of tax proposals to address these issues. For purposes of this discussion, we will refer to the gift of parkland or recreation land to a government agency or publicly-supported charity as a “qualifying contribution.”

  1. Allow the gift of a qualifying contribution to flow through a Subchapter S corporation to the shareholders without regard to the shareholders’ basis in their stock. Under current law, losses in an S corporation, and charitable contributions by an S corporation, now flow through to a shareholder only to the extent the shareholder has stock basis. Peculiarly, the same rule does not apply to a partnership and its partners, where charitable contributions flow through without regard to basis, as in Example #4 above.
  2. Allow a deduction for the full fair market value of the qualifying contribution in the case of donations by real estate developers. Under current law, the charitable contribution of so-called “inventory” property is limited to cost or basis. Typically, the IRS often argues that all land of a community builder is “inventory” property.
  3. Increase the percentage limitation for qualifying contributions. Perhaps the corporate income tax deduction could go to 25% of taxable income (up from the current 10%), and/or the individual deduction (or perhaps partnership or S corporation flow-through) could go to 50% of adjusted gross income (up from the current 30%).
  4. Allow a qualifying contribution to flow through a regular “C” corporation (not an S corporation) to its shareholders if they number 25 or less.
  5. In the case of a bargain sale of qualifying property (sale for less than fair market value to a charitable or government purchaser), allow all basis to be allocated to the sale portion. Basis now must be allocated between the sale portion and the gift portion, resulting in more gain and therefore more tax.
  6. Allow a deduction for the greater of basis or fair market value. This may be helpful for property that has lost value.
  7. Allow a longer carryforward of any unused deduction (say a ten-year carryforward instead of a five-year carryforward).
  8. Craft a rule that allows a deduction for a qualifying contribution whether or not it was required by the regulatory jurisdiction as a condition of regulatory or zoning approval. Under current law, if such a donation is offered or required as a condition of project approval, no deduction is allowable under the so-called quid pro quo rule. This rule encourages developers to limit parks to the smallest possible acreage, rather than to be generous with gifts of parkland.
  9. On audit (if there is one…), allow the full amount of the deduction claimed as long as the value finally determined (on audit or in litigation) is not less than 85% of the claimed value.


For purposes of determining the amount of a charitable contribution, the federal tax rules define fair market value generally as what a willing buyer will pay a willing seller, each having knowledge of all relevant facts and neither under any compulsion to buy or sell.

In the area of charitable gifts of land for conservation, open space, and public purposes, over the years the case law has generally evolved to define fair market value based solely on development potential. Put another way, real estate that can be readily subdivided and sold as expensive house lots, or property that can be turned into a high-value residential or commercial project, is determined to have a very high dollar value and the gift of such property generates a very high income tax deduction for the donor.

Compare this with property that has very high environmental or “public” value but very little commercial or industrial development potential, such as creek banks and riverfront land, wetlands, scenic oak groves, monumental ancient trees, and major historic sites. While numerous scientific studies over the years have established that wetlands, for example, have very high dollar “replacement” value, under current rules the charitable gift of important wetlands would be deemed to have little if any value for deduction purposes because they are so heavily regulated that they typically have no “market value” and no development potential.

As another example, an old railroad line only 40 feet wide would have a low value for real estate development purposes but an extremely high value to the public as a bike trail. Similarly, a walking or bicycle trail, twenty feet wide by five miles long in an urban or suburban area, may have no “fair market value” whatsoever in the commonly accepted appraisal sense but may be available to the public and may be used on average by hundreds of people every day. A Silicon Valley town is reported in the newspapers as debating paying $12 million to extend a hiking trail only 2 miles.

A goal of this Tax Incentives for Parklands project will be to work with qualified appraisers to develop acceptable alternate valuation methodologies that can take into account non-traditional (in the tax code sense) but quantifiable public values, from environmental values to public use benefits, to support more meaningful income tax deductions for environmentally important property and property that is devoted to and available for public recreational use.


The work effort for this White Paper has been funded by the National Recreation Foundation and administered by the Urban Land Institute. The sponsors suggest this project go forward in two phases. The first phase will involve refining the list of tax incentives and the approach to “public benefit” valuation while simultaneously raising funds and organizing a broad base of public and political support to seek implementation of these changes. The second phase will involve the actual lobbying effort (by individuals and entities permitted to engage in lobbying) to enact these changes into law.

Public effort:  Phase I

Phase I of this project needs to go forward on five parallel tracks, with progress on all tracks simultaneously.

  1. Assemble a small working group of tax advisors knowledgeable in the relevant fields, along with Washington, D.C., lobbying counsel, to refine (initially perhaps on a pro bono basis) the list of tax incentives (different incentives could be added to the list if appropriate). This group could involve representatives from groups such as The National Parks and Recreation Association, the Land Trust Alliance, the Trust for Public Land, and The Nature Conservancy, as well as large community builders and industrial and utility corporations with major landholdings. The goal here would be to develop a list of targeted incentives that would accomplish our park and recreation land donation goals, be relatively easily understood, and be realistic as a political matter.
  2. Once funding has been arranged, assemble a small working group of tax advisors, appraisers, and other consultants knowledgeable in the relevant disciplines to refine the proposed “public benefit” appraisal methodology. This concept is easy to state but it is essential to come up with a working model or some other framework to maintain credibility.
  3. Compile a list of state, regional, and national organizations and government agencies that can provide financial support and/or endorsement for this effort. Target a small number and contact them in this first round to broaden our financial and endorsement base.
  4. Compile a list of state, regional, and national conservation and/or recreation organizations that can provide financial support and/or endorsement for this effort. Target a small number from    this list and contact them in this first round to broaden our financial and endorsement base.
  5. Compile a list of community builders who would be logical candidates for financial support and/or endorsement. Target a small number and contact them to broaden our financial and endorsement base.

Public effort:  Phase II

By the end of the first phase we will have a specific list of incentives and a core group of funding and endorsements. Phase II will be a concentrated lobbying effort, targeting the appropriate administrative officials and lawmakers in Congress. This effort will be coordinated by Washington advisors with relevant lobbying experience.


New tax incentives to encourage gifts of parkland and recreation land for public enjoyment would be consistent with existing congressional policy. Such incentives are needed to encourage some of the nation’s largest landowners, with property in the path of urban growth, to make planned gifts with truly incalculable public benefit. Such incentives would also encourage many other gifts of critical tracts of open space, now in private hands, for the public good.

As the Examples at the beginning of this White Paper illustrated, it is not inaccurate to say that the tax code now actually discourages such gifts. It is time to move forward to correct this situation.